Is A 30-Year Fixed Loan Right For You?

Have you been thinking about buying a house and wonder what the absolute best mortgage loan is for you? In this video, we're going to talk about the 30-year mortgage term. We'll look at who qualifies, what loan products are available, and hear from a past client to see if this option is right for you.

The 30-Year Term

A 30-year loan product is the most popular loan term. Why? Because home values are up, mortgage loans are costly, and the amount of money that people are borrowing is at an all-time high. Most clients want to spread their payments out long-term.

One of the big negatives to a 30-year loan product is the amount of interest that you pay over a shorter term, such as a 20, 15, or even a 10-year product. It’s an astronomical amount of interest. We’re not going to focus too hardcore on that right now; rather, we're going to look at other loan types you can get with a 30 year. We'll also hear about our client, Randy, who can qualify for all of these.

Conventional Loans

One of the most popular products for our clients is a conventional loan. This is because it's historically one of the cheapest loan products to utilize when you’re buying or refinancing a home. They typically don’t have a ton of extra ancillary fees - like a VA, FHA, or even a USDA loan does, which are government-backed products.

Randy was a first-time homebuyer and a veteran. We thanked him for his service, of course, so he can use his VA loan benefits with his certificate of eligibility. He could also get an FHA loan, and of course, a conventional loan. Randy was a little different than most first-time homebuyers, and he did have quite a bit of money in the bank (around $500,000). He wanted to figure out what loan was best for him.

He heard that VA loans are really great, but that the FHA loan could be good, too. We wanted to show and tell him what loan product possibly would be best by just presenting him with different findings.

Randy's Choices

First, Randy decided that his max purchase price was right around $620,000. Because he didn’t feel comfortable spending more than that on his property, we showed him a couple of different options for the conventional loan - which included a 10% and 20% down loan option. We also showed him the 10% down FHA loan option, and of course, a VA loan where he didn’t have to put any money down because of his VA loan entitlement benefits.

There are some pros and cons to each of the loan products. There are also some variants between FHA and VA loans, which have a much lower interest rate than the conventional loan price. Why? Because those are backed by the federal government. One of the negatives for both of those loan products is that, of course, they come with an upfront financing fee that the government charges just to utilize the loan.

Analyzing The Numbers

What we did with Randy is we put him through our total cost analysis presentation, including our spreadsheets and software that pulls in all of the data for these products. We helped him analyze his monthly payment, his 5-year cost, and the 15-year costs of every single loan.

There were a couple of things that Randy considered. One was putting 20% down so he could have a payment that was less than $3,000. Although he could afford the VA product - which was the most expensive monthly payment of $3,300 - the benefit was the fact that he didn’t have to put any money down to make the loan to value work. The VA loan entitlement also gave him a very nice interest rate of about half a percent lower than the conventional loan product.

However, when we analyzed his savings in the first five years, the conventional loan was actually cheaper in the amount of interest that was paid. In addition to that, the balance that he would owe at the end of that first five years was over $120,000 less than doing the VA loan.

Considering The Options

When deciding on a loan, you have to consider all of your different options. There are going to be monthly payment variants between loan products, differences in how much you put down, possible differences in interest rate, and of course, the total amount of interest that you’re paying in mortgage insurance if required. There’s a lot more to consider than just the interest rate and the downpayment.

If we look at the 15-year time horizon - which was a longer-term property for Randy - he thought he could live in his home for about 15 or 20 years. We wanted to look that far out into the future, even though this was his least important metric of figuring out what loan product he wanted to do.

On the 30-year conventional product with 10% down, his interest in mortgage insurance paid in 15 years was just over $290,000. The overall cheapest loan product again won out, which was the 30-year conventional loan. This was followed by the FHA loan. The reason that the VA loan came back in last place on this metric was that he was borrowing the most money at the start of the loan file.

Which Loan Product Is Right For You?

Now that you know some of the little metrics behind the scenes - and what all of our clients utilize to figure out what loan product is best. What would you have picked if you had 740 credit, $500,000 in the bank, and all of those loan products available to you?

The 30-year product is a fantastic loan product. Keep in mind that the ones that we just talked about here have no prepayment penalty. This means that if you wanted to throw in extra money towards principal every single month, just like Randy plans on doing, you can turn a 30-year product into a 20 or even a 15 if you put enough down.

If you have any questions about which loan product is best for you, feel free to reach out to me and I'll be happy to help. Don't forget to subscribe to my channel so you never miss an episode of my show, and stay tuned to see what I feature next!